Dollar’s rise reminder for us to innovate
Toronto Star
By David Crane
What to do about the Canadian dollar?
It’s not only businesses that export to the United States that face a loss of competitiveness. Canadian companies that have to compete here at home against U.S. producers are also under competitive stress, as is our tourism industry.
Businesses can squeeze their profit margins and find ways to cut costs, but this won’t take a company very far.
The real answer to this shift in the competitive environment, with the sharp rise in our dollar from about 65 cents (U.S.) to 84 to 85 cents, is to become more innovative and productive through new products or services based on research and development, better trained workers, investment in new technologies, new relationships with customers and suppliers, more effective workplace structures and other changes that lead to higher-value activities.
The rise of the Canadian dollar, then, is a strong and timely message that Canada has to become much better at innovation. This is the most important way to raise our productivity, which is the source of future
competitiveness and good jobs.
We certainly have lots of room to improve. According to three economists from Industry Canada — Someshwar Rao, Jianmin Tang and Weimin Wang — in 2003, “Canada’s labour productivity level in the business sector was about 23 per cent below the U.S. level.” This compares with an 18 per cent gap in 1999. Canada-U.S. free trade has failed to close the gap, though the economic rationale for the trade deal was to do just that.
Writing in The Productivity Monitor, published by Canada’s Centre for the Study of Living Standards, the three economists offer a hopeful message, namely that “the higher the level gap, the larger the scope for a faster productivity growth in Canada due to catch-up.” But that depends on what we do to encourage innovation and productivity growth.
A separate analysis in the same Productivity Monitor by two economists from the Department of Finance — Julie Turcotte and Lori Whewell Rennison — argues that investment by Canadian companies in information and communications technologies, coupled with training in ICT skills, were major drivers in higher labour productivity growth in the late 1990s. Even workers with just a high school diploma became much more productive with computer
training.
Overall, the two economists found, “productivity is higher the more intensely technology is used within the firm (the higher the share of workers using a computer), the higher the share of the workforce with a university degree, the higher the share of workers participating in formal training, and the higher the share of workers
receiving computer training.”
These messages are reinforced in the latest annual report of Ontario’s Task Force on Competitiveness, Productivity and Economic Progress, chaired by Roger Martin, dean of the Rotman School of Management at the University of Toronto.
The report focuses on Ontario’s productivity gap with comparable states in the United States, making the case that Ontario — government and industry — must invest much more in the sources of innovation, from education and infrastructure in the public sector to new machinery and equipment and research and development, as well as employee training, in the business sector. The two have to work in parallel.
One of the immediate things that the federal government and the Ontario government can do to boost innovation and productivity, in their next budgets, is to provide stronger incentives to business to invest in new technology. As the report stresses, “we under invest in machinery, equipment, and software,” arguing that we must boost the investment in our future.
This investment in new technologies and non-residential infrastructure “enables workers to be more productive, giving them new and better tools to do their work,” the task force says, adding that “innovation and upgrading of products, services, and production processes are typically embedded in the machinery and equipment component of investment.”
And, “increasingly, this investment consists of computer hardware and software and telecommunications made by knowledge-intensive companies — a key driver of productivity growth.”
So what’s needed now, as one response to our rising dollar and the need for greater innovation, are tax measures to reward companies making such investments by eliminating, for example, the capital tax, providing for much more rapid depreciation of new production technologies, and considering a tax credit for such investments.
This is only part of what needs to be done. But it would be a good start for a 21st century economy with an 85-cent dollar.
David Crane’s column appears on Friday. He can be reached at .(JavaScript must be enabled to view this email address) by email or by fax at 416-926-8048.
